Policy Proposals Environment and Energy
Towards the Formulation of a New Energy Mix

April 6, 2015Keidanren

The Japanese Government established the Subcommittee on Long-term Energy Supply-Demand Outlook under the Advisory Committee for Natural Resources and Energy to deliberate Japan's future energy mix. As energy provides the foundation for national livelihood and business activities, energy policy constitutes an essential part of national strategy for Japan, which relies on other countries for a majority of its energy resources. Moreover, with energy-related CO2 emissions currently accounting for 90 percent of domestic greenhouse gas emissions in Japan, the energy mix will bear importance in defining Japan's climate change measures. With this in mind, Keidanren has compiled a proposal for the formulation of a renewed future energy mix.

1. Basic concept

The new energy mix must balance the goals of stable supply, economic efficiency and environmental suitability based on the premise of ensured safety ("S+3E"). In particular, from the viewpoint of ensuring conformity with Japan's growth strategy, it is crucial that energy is supplied stably at an economic price.

The price of electric power, a secondary energy source, has risen by approximately 30% since the Great East Japan Earthquake, thus affecting the Japan's economy and the industrial competitiveness of Japanese companies. According to the questionnaire survey conducted by Keidanren, more than 70 percent of manufacturing companies responded that their affordable price limit for electric power were prices equivalent to or below price levels prior to the Great East Japan Earthquake, and that if prices should exceed those levels, almost 60 percent of manufacturing companies would reduce domestic capital investment and 50 percent would reduce employment.

In light of the fact that even prior to the Great East Japan Earthquake, high energy costs had undermined Japan's industrial competitiveness, it is important that the new energy mix can keep electric power prices below pre-earthquake levels, relative to international levels. This will call for a goal of securing a 60-percent baseload power#1 ratio, as in the United States and Europe.

2. Energy mix in 2030

Upon formulating this proposal, Keidanren asked the Research Institute of Innovative Technology for the Earth (RITE) to conduct a model analysis on the energy mix in power generation in 2030 and its impact on the economy and environment, based on scenarios that assume an energy mix with renewable energy accounting for 15-30 percent and nuclear power accounting for 15-30 percent.

The major results of the model analysis are provided below:

Fossil fuels continue to bear an important role in primary energy supply in 2030.

A 5 percentage point increase in the renewable energy ratio increases costs by 600 billion to 1.1 trillion Japanese yen. In particular, if an emphasis is laid on solar power as it is now, costs will be 300-500 billion Japanese yen higher compared to the introduction of renewable energy by merit order.

A 5 percentage point increase in zero-emission power plants (renewable energy and nuclear power) will reduce energy-related CO2 emissions by 2-3 percentage points.

According to the analysis results, in general, "the higher the nuclear power ratio and the lower the renewable energy ratio," the larger the favorable impacts (the smaller the adverse impacts) on the economy become.

If the total renewable energy ratio is below 15 percent, there will be very limited impact on the economy provided each renewable energy source is introduced according to merit order,

Based on the abovementioned results and from an "S+3E" perspective, it is reasonable to have renewable energy account for approximately 15 percent of the energy mix in power generation in 2030, with nuclear power responsible for more than 25 percent and thermal power contributing approximately 60 percent. Under this generation mix, according to the model analysis, the baseload power ratio would exceed 62% (nuclear power: 25+ percent; coal: 27 percent; geothermal power and hydropower: 10 percent).

However, to contribute to the resolution of global warming issues while ensuring energy security, it is important that Japan engage in ambitious efforts to further increase the zero-emission power plant ratio and its energy self-sufficiency ratio#2 as a national strategy. Japan should provide focused support on the research and development of technologies, including innovative technologies that deviate from the conventional chain of technological development, in order to reduce costs of technologies, and thus achieve further energy savings and expand the use of renewable energy. These efforts should be made with an aim to raise the renewable energy ratio to approximately 20 percent#3.

By expanding such achievements overseas, Japan can contribute to the resolution of global challenges such as energy security and global warming as well as develop new markets.

3. Efforts towards the achievement of the 2030 energy mix

In light of the "Basic Concepts" provided in the Section 1, the following efforts must be made:

(1) Assume an appropriate energy demand level

Future energy demand must be appropriately forecasted in order to consider an optimal energy mix. Because energy demand and economic scale are generally positively correlated#4, it is important that an appropriate economic growth rate is assumed. In past deliberations on energy policy in the government, the economic growth rate applied had occasionally been different from those assumed for other policy fields, but this time, the assumed growth rate should be in conformity with that used in other fields including the growth strategy and pension financing.

All "three E's" can be addressed through energy saving efforts. Therefore, the business community will make the maximum efforts possible to develop and promote energy-saving technologies. In the household sector, as well, public campaigns must be promoted in order to encourage consumers to save electricity in operation and to replace existing appliances with electric power-saving models.

However, assuming unrealistic energy demand levels premised on overestimated large energy savings could force companies to shoulder excessive investments in energy savings or impose limits on productions. From the perspectives of addressing global warming and encouraging energy conservation, Keidanren is currently implementing Phase II of the Keidanren's Commitment to a Low Carbon Society, which is a proactive approach with targets set up for 2030. The action plans formulated by each industry under the Keidanren's Commitment to a Low Carbon Society should be taken into consideration upon estimating future energy demand.

Energy conservation is an essentially important issue for countries like Japan that possess little natural resources. However, unrealistic demand forecasts could invite energy supply shortages, energy price surges and increased energy saving costs. Hence, demand levels should be estimated realistically by setting an appropriate value for GDP elasticity of electricity demand based on past trends, considering the barriers to energy efficiency and the high marginal costs to implement remaining energy-saving potential, avoiding the setting of unrealistic payback periods and the double-counting of energy-savings at the macro level and individual energy-saving measures. Japan must also be prepared to adjust to future changes in the energy supply-demand structure, including the sophistication of manufacturing processes and developments in electrification and information management.

(2) Enhance the energy supply structure

1) Nuclear power

Nuclear power is not only a highly environmentally suitable and quasi-domestic energy source, it is also economically attractive and is capable of delivering stable output. It, therefore, promises to serve a significant role as baseload power. As a result of increased thermal power generation after nuclear power plants were stopped, fuel costs increased by approximately 3.7 trillion Japanese yen in 2014 and the current-account surplus has continued to decrease for three consecutive years. From the viewpoint of maintaining and enhancing human resources and technologies as well, Japan must make maximum use of existing nuclear power plants and consider their renewal, on the premise of ensured safety.

Therefore, in addition to ensuring the reliability of nuclear power, it is required of Japan to improve the foreseeability of safety inspections, extend the operating lifetime of nuclear power plants that have been confirmed to be safe, and establish a framework that facilitates new investments in fields including safety as well as the recovery of loans and investments as the electricity market deregulation develops. Japan must also be prepared to smoothly advance the decommissioning of nuclear power plants when policy changes require such procedures, establish the nuclear fuel cycle and secure a final disposal site for radioactive waste, and review the current nuclear damage compensation system#5.

It is important that Japan explicitly includes nuclear power in its energy mix and that it consistently promotes the establishment of its nuclear fuel cycle in order to facilitate the extension of the Japan-U.S. nuclear cooperation agreement and contribute to the world's peaceful use of nuclear energy.

Upon promoting the abovementioned efforts, the Japanese government must take the initiative in campaigning to promote public understanding and Keidanren is determined to support Government measures to the maximum extent possible.

2) Renewable energy

Renewable energy is an important energy source with high potential in terms of energy security and preventing global warming. Therefore, its introduction should be consistently promoted in a sustainable manner with a view towards the future. Japan must make maximum efforts to increase local understanding in host areas and to relax environmental regulations and engage in the proactive introduction of renewable energy sources such as hydropower and geothermal power, which can be utilized in baseload power plants, as well as promote research and development for the resolution of issues including inefficiency, instability and high cost. If the introduction of renewable energy is continued under the current circumstances, public burden will be extremely large. With this in mind, the targets stipulated in the Strategic Energy Plan should also be reviewed upon formulating the future energy mix.

The feed-in-tariff (FIT) scheme introduced in 2012 has not proved to be a cost-effective measure for the introduction of renewable energy and has consequently caused increased national burden and an overemphasized introduction of solar power. The policy should be fundamentally revised by correcting the irrationality of the scheme, which would also involve dealing with already approved facilities, as well as by setting an upper limit to the introduction of power plants that are costly and cannot assume the role of baseload power plants. It is also necessary to immediately review the current priority dispatch for renewables in order not to disturb the utilization of coal-fired thermal power plants as baseload power plants.

Renewable energy can contribute to local revitalization and securing local energy assurance and safety. Therefore, the Government should promote the local production and consumption of energy by effectively utilizing small-scale biomass power and small-scale hydropower generation.

3) Fossil fuels

Fossil fuels will remain an extremely important energy source supporting national livelihood and business operations in 2030, and thus should continue to be effectively utilized, accompanied by efforts to improve efficiency levels and achieve lower-carbonization. Crude oil and LNG must be shipped from the Middle East to Japan through strategic zones such as the Strait of Hormuz; and therefore, a state of emergency in this area may obstruct the stable supply of energy in Japan#6. Furthermore, although crude oil prices have recently dropped, forecasts of continued economic growth in emerging economies indicate a high possibility that prices will rise again. Japan must proactively engage in resource diplomacy and in developing domestic resources.

Petroleum accounts for a large portion of Japan's primary energy supply. Despite its shortcomings in terms of economic efficiency for power generation, petroleum bears the important role of a peaking power source that can flexibly adjust the power output in accordance with electric power demand and also supports national livelihood as a fuel used for transportation and heating. Furthermore, intensively utilized as industrial raw material, petroleum must be used efficiently for future generations.

While coal is associated with high levels of CO2 emissions, it has an advantage over other energy sources in terms of its economic efficiency and stable output. Moreover, it serves the purpose of ensuring stable supply because coal has a large reserve to production ratio and is widely distributed worldwide. Especially, as a fuel for power generation, it is expected to assume an important role as baseload power, while efforts are made to promote its high-efficiency use and considerations for the environment. It is also important that through such domestic efforts, Japan fosters high-level technologies domestically and that while it enhances its industrial competitiveness, it contributes to efficiency improvements in coal-fired thermal power generation overseas, where demand is likely to follow an upward trend.

Natural gas can be found widely in areas other than the Middle East. With little CO2 emissions, it serves the purposes of stable supply and environmental suitability.

4. Improving the environment for a stable energy supply

(1) Energy system reform

The purpose of energy system reform is the stable supply of energy at an even lower price. Therefore, failure in achieving this purpose would indicate that the reform has not been successful. Reform should be implemented with due consideration of lessons learned in other countries, making sure to conduct the verification provided for in the supplementary provisions of the Bill for the Act for Partial Revision of the Electricity Business Act and Other Related Acts for the 3rd stage of the reform and taking necessary measures in order to achieve the abovementioned purpose and ensure that prices do not surge and that the energy supply remains stable.

While we are challenged with reducing energy costs, the Carbon Tax has been accelerating surges in energy costs and must therefore be fundamentally reviewed, including consideration of its abolishment. Moreover, it would be absolutely unacceptable for the tax to be used for wider purposes or for an additional tax to be established for other policy purposes, including forest sink measures.

(3) Global warming countermeasures

A fair and effective international framework in which all major emitters participate must be established at the COP 21 meeting to be held at the end of this year in Paris. In light of the fact that energy-related CO2 emissions account for almost 90 percent of Japan's total greenhouse gas emissions, Japan must formulate domestic global warming countermeasures based on its energy mix, as well as proactively contribute to international negotiations for the establishment of a new framework.

Power generated by dependable power plants to consistently meet demand through day and night at a low cost such as geothermal power, hydropower, nuclear power, and coal-fired power plants.

According to RITE's analysis results, the primary energy self-sufficiency ratio (including nuclear power) will be approximately 23% in 2030.

In July 2013, Keidanren conducted a questionnaire survey with a view to affect the Government's New Low Carbon Technology Plan and identified key energy and low-carbon technologies, including 14 technological fields in energy saving, 6 in renewable energy use; 2 in storage batteries and electric power transmission and distribution and 7 in the sophisticates use of fossil fuels including CCS (Carbon Capture and Storage). More intensive support must be provided for technological development in these fields.

For the past 40 years, a 1 percent rise in GDP would indicate a one or more percent rise in electric power demand. The GDP elasticity of electricity demand in 2001-2010 was 1.0.

Article 6, paragraph 1 of the supplementary provisions of the Nuclear Damage Compensation and Decommissioning Facilitation Corporation Act enacted in August 2011 provides that "As soon as possible after the enforcement of this Act [...] the government [...] shall take the necessary measures [...], including a fundamental re-examination of the amendment, etc. of the Act on Compensation. The Diet resolution accompanying the enactment of the law interprets "as soon as possible" to mean "in around one year."

Japan relies on Middle East countries for 83% of its crude oil (2013), most of which is transported by oil tankers that pass through the Strait of Hormuz. After the Strait of Hormuz, the crude oil passes through the Strait of Malacca, which has quite large amount of traffic and is located in the Southeast Asian seas where piracy has become an increasing threat since 2008.